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on Utility Models and Prospect Theory |
| By: | Mark Schneider (Economic Science Institute, Chapman University); Jonathan Leland (National Science Foundation); Nathaniel T. Wilcox (Economic Science Institute, Chapman University) |
| Abstract: | In his exposition of subjective expected utility theory, Savage (1954) proposed that the Allais paradox could be reduced if it were recast into a format which made the appeal of the independence axiom of expected utility theory more transparent. Recent studies consistently find support for this prediction. We consider a salience-based choice model which explains this frame-dependence of the Allais paradox and derive the novel prediction that the same type of presentation format which was found to reduce Allais-style violations of expected utility theory will also reduce Ellsberg-style violations of subjective expected utility theory since that format makes the appeal of Savage’s “sure thing principle” more transparent. We design an experiment to test this prediction and find strong support for such frame dependence of ambiguity aversion in Ellsberg-style choices. In particular, we observe markedly less ambiguity-averse behavior in Savage’s matrix format than in a more standard ‘prospect’ format. This finding poses a new challenge for the leading models of ambiguity aversion. |
| Keywords: | Ellsberg paradox; Ambiguity Aversion; Framing Effects; Expected Utility |
| JEL: | C91 D81 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:chu:wpaper:16-11&r=upt |
| By: | Dorner, Zach; Brent, Daniel A.; Leroux, Anke |
| Abstract: | Risk is an important attribute of goods, whereby the utility derived from that attribute is determined by one's attitude to risk. We develop a novel approach to leverage data on risk attitudes from a fully incentivized risk elicitation task to model intrinsic riskiness of alternatives in a choice experiment. In a door-to-door survey, 981 respondents participated in a discrete choice experiment to elicit pref- erences over alternative sources of municipal water, conditional on water price and quality. Additional source attributes, such as supply risks due to the water source being weather dependent or technology risks are treated as intrinsic as they cannot be plausibly disassociated from the water supply source. The risk task allows the estimation of a coefficient of constant relative risk aversion (CRRA) for an indi- vidual, which is incorporated into the preference estimation to test the hypotheses that supply risk and new technology risk are important intrinsic attributes for new water sources. Participants are not given information about supply or technological risks of the sources to avoid framing effects driving the results. Controlling for water quality and cost, we find that supply risk is an important determinant of participants' choices, while respondents are not concerned about technology risk. |
| Keywords: | Research and Development/Tech Change/Emerging Technologies, Research Methods/ Statistical Methods, Risk and Uncertainty, |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea16:236644&r=upt |
| By: | Bayrak, Oben |
| Abstract: | Although there are alternative models which can explain the Allais paradox with non-standard preferences, they do not take the emerging evidence on preference imprecision into account. The imprecision is so far incorporated into these models by adding a stochastic specification implying the errors that subjects make. However, there is also the inherent part of the preference imprecision which does not diminish with experience provided in repeated experiments and these stochastic specifications cannot explain a significant portion of the observed behavior in experiments. Moreover, evidence on imprecision suggests that subjects exhibit higher imprecision for a lottery with a higher variance. This paper presents a new model for decision under risk which takes into account the findings of the literature. Looking at the indifference curves predicted by the new model, the new model acts like a mixture of Expected Utility Theory and Rank Dependent Utility Theory depending on which part of the probability triangle the lottery is located. |
| Keywords: | Allais Paradox, Independence Axiom, Preference Imprecision, Anomalies, Decision Theory, Decision under Risk and Uncertainty, Alternative Models |
| JEL: | A1 A10 B0 C0 C9 D0 D00 D01 D02 D03 D04 D10 D11 D8 D80 D81 D83 D89 G0 G02 |
| Date: | 2016–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:71780&r=upt |
| By: | Subha Mani; Saurabh Singhal; Smriti Sharma; Utteeyo Dasgupta |
| Abstract: | Heterogeneity in subject populations often necessitates choosing an elicitation task that is intuitive, easy to explain, and simple to implement. Given that subject behaviour often differs dramatically across tasks when eliciting risk preferences, caution needs to be exercised in choosing one risk elicitation task over another.Using a within-subject design, we compare behaviour in the simple most investment game (Gneezy and Potters 1997) and the ordered lottery choice game (Eckel and Grossman 2002) to evaluate whether the simpler task allows us to elicit attitudes consistent with those elicited from the ordered lottery task.Using a large sample of over 2000 subjects, we find risk attitudes to be fairly stable across the two tasks. Our results further indicate that the consistency of risk attitudes across the tasks depends on gender of the subject, quantitative skills, father.s education level, and dispositional factors such as locus of control and Big Five personality traits. |
| Keywords: | Experimental design, Risk |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2016-047&r=upt |
| By: | Bo Honoré (Institute for Fiscal Studies and Princeton); Áureo de Paula (Institute for Fiscal Studies and University College London) |
| Abstract: | This paper introduces a bivariate version of the generalized accelerated failure time model. It allows for simultaneity in the econometric sense that the two realized outcomes depend structurally on each other. Another feature of the proposed model is that it will generate equal durations with positive probability. The motivating example is retirement decisions by married couples. In that example it seems reasonable to allow for the possibility that each partner's optimal retirement time depends on the retirement time of the spouse. Moreover, the data suggest that the wife and the husband retire at the same time for a nonnegligible fraction of couples. Our approach takes as a starting point a stylized economic model that leads to a univariate generalized accelerated failure time model. The covariates of that generalized accelerated failure time model act as utility-flow shifters in the economic model. We introduce simultaneity by allowing the utility flow in retirement to depend on the retirement status of the spouse. The econometric model is then completed by assuming that the observed outcome is the Nash bargaining solution in that simple economic model. The advantage of this approach is that it includes independent realizations from the generalized accelerated failure time model as a special case, and deviations from this special case can be given an economic interpretation. We illustrate the model by studying the joint retirement decisions in married couples using the Health and Retirement Study. We provide a discussion of relevant identifying variation and estimate our model using indirect inference. The main empirical nding is that the simultaneity seems economically important. In our preferred speci cation the indirect utility associated with being retired increases by approximately 5% when one's spouse retires. The estimated model also predicts that the marginal eff ect of a change in the husbands' pension plan on wives' retirement dates is about 3.3% of the direct eff ect on the husbands'. |
| JEL: | J26 C41 C3 |
| Date: | 2016–02–17 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:cemmap:07/16&r=upt |
| By: | Anagol, Santosh; Balasubramaniam, Vimal; Ramadorai, Tarun |
| Abstract: | Winners of randomly assigned initial public offering (IPO) lottery shares are significantly more likely to hold these shares than lottery losers 1, 6, and even 24 months after the random allocation. This effect persists in samples of wealthy and highly active investors, suggesting along with additional evidence that this type of "endowment effect" is not solely driven by portfolio inertia or wealth effects. The effect decreases as experience in the IPO market increases, but persists even for the most experienced investors. These results suggest that agents'; preferences and/or beliefs about an asset are not independent of ownership, providing field evidence derived from the behavior of 1.5 million Indian stock investors which is in line with the large laboratory literature documenting endowment effects. We evaluate the extent to which prominent models of endowment effects and/or investor behavior can explain our results. A combination of inattention and non-standard preferences (realization utility) or non-standard beliefs (salience based probability distortions) appears most consistent with our findings. |
| Keywords: | causal inference; endowment effect; exchange asymmetry; inattention; India; loss aversion; lotteries; reference dependence; salience |
| JEL: | C93 D12 G11 G14 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11328&r=upt |
| By: | Matteo Ploner; Viola Saredi |
| Abstract: | The study reports on the agency problem embedded in delegated risky decisions, by analyzing discrepancies in risk-taking and decision quality. It also combines delegation with a description-experience comparison. Subjects deciding on behalf of others tend to make inefficient investment decisions: principals are more ambitious, and make fewer and less dominated choices, irrespective of the process of information acquisition. While principals adapt their effort to the complexity of the situation, agents are reluc- tant to collect information to evaluate prospects. Principals predict agents poor performance and are ready to pay a substantial fee to avoid delegation. However, the fee is generally excessive and negatively impacts on final earnings. These results suggest that principals attitudes and negative beliefs on agents may prevent the emergence of delegation relationships. |
| Keywords: | Description-Experience Gap, delegated decision-making, control premium, risk taking; experiment |
| JEL: | C91 D81 D83 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpce:1606&r=upt |
| By: | Yola Engler; Rudolf Kerschbamer; Lionel Page |
| Abstract: | For the trust game, recent models of belief-dependent motivations make opposite predictions regarding the correlation between back-transfers and second- order beliefs of the trustor: While reciprocity models predict a negative correlation, guilt-aversion models predict a positive one. This paper tests the hypothesis that the inconclusive results in previous studies investigating the reaction of trustees to their beliefs are due to the fact that reciprocity and guilt-aversion are behaviorally relevant for different subgroups and that their impact cancels out in the aggregate. We find little evidence in support of this hypothesis and conclude that type heterogeneity is unlikely to explain previous results. |
| JEL: | C25 C70 C91 D63 D64 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2016-17&r=upt |
| By: | Carla Guerriero (Università di Napoli Federico II and CSEF); John Cairns (London School of Hygiene and Tropical Medicine); Fabrizio Bianchi (IFC CNR Pisa); Liliana Cori (IFC CNR Pisa) |
| Abstract: | Despite the importance of including children’s preferences in the valuation of their own health benefits no study investigated the ability of children to understand willingness to pay questions. Using a contingent valuation study we elicit children’s and parents’ willingness to pay (WTP) to reduce children’s risk of an asthma attack. Our results suggest that children are able to understand and value their own health risk reductions and their ability to do so improves with age. Child age was found to be inversely related to parents’ and children’s WTP. The results also suggest that non-paternal altruism is predictive of children’s WTP. For parents, care for their own-health, was found to be inversely related with their WTP for children’s risk reductions. Comparison of parents’ vs. children WTP suggest that parents are willing to sacrifice for their child’s health risk reduction an amount that is approximately twice the size of their children. The analysis of matched pairs of parents and children suggest that there are within-household similarities as the child’s WTP is positively related to parents’ WTP. |
| Keywords: | willingness to pay, contingent valuation, children’s preferences, children’s rationality |
| Date: | 2016–06–18 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:448&r=upt |
| By: | Stefano Colonnello; G. Curatola; N. G. Hoang |
| Abstract: | We develop a model of managerial compensation structure and asset risk choice. The model provides predictions about the relation between credit spreads and different compensation components. First, we show that credit spreads are decreasing in inside debt only if it is unsecured. Second, the relation between credit spreads and equity incentives varies depending on the features of inside debt. |
| Keywords: | inside debt, credit spreads, risk-taking |
| JEL: | G32 G34 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:iwh:dispap:20-16&r=upt |
| By: | Da-Rocha, Jose-Maria; García-Cutrin, Javier; Gutierrez, Maria Jose |
| Abstract: | By using robustness methods we design HCRs that explicitly include scientific uncertainty. Under scientific uncertainty –when the perceived model can be generated by a nearby op- erating model– robust HCRs are designed assuming that the (inferred) operating model is more persistent than the perceived model. As a result, a robust HCR has a steeper ratio between fishing mortality and biomass than a non robust one. We prove that constant effort HCRs are not robust. Moreover, rather than decreasing fishing mortality reference points for exploitation, the optimal robust response to scientific uncertainty is to increases biomass precautionary limit points when knowledge about the stock status decreases. Finally, we show that robustness can be implemented if fishing mortality is increased faster than lin- early –by a factor of 2-fold– when a stock is assessed as above 0.5BMSY. We illustrate our findings by designing HCRs for 17 ICES stocks using this rule of thumb. |
| Keywords: | HCR, Robustness |
| JEL: | C61 Q22 |
| Date: | 2016–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:72059&r=upt |
| By: | Nick Hanley (Department of Geography and Sustainable Development, University of St. Andrews); Oleg Sheremet (Department of Geography and Sustainable Development, University of St. Andrews); Martina Bozzola (International Trade Centre, Geneva); Alexander Kasterine (International Trade Centre, Geneva); Douglas C. MacMillan (DICE, School of Anthropology and Conservation, University of Kent) |
| Abstract: | The international demand for endangered animal and plant species as traditional medicine, luxury foods and curios is strong and rising, especially in eastern Asia. The illegal poaching of wildlife to supply this market represents an immediate and growing threat to the survival of many endangered species. To counter the illegal international wildlife trade, the global community remains committed to supply-side trade restrictions and enforcement of poaching laws. However, despite these actions recovery in the populations of many species is being threatened by rising poaching rates over the last 10 years. In this paper, we use a choice experiment undertaken with over 800 residents of Vietnam, in order to investigate how the demand for rhino horn varies according to its source attributes. The survey sample includes 130 respondents who reported having either purchased or used rhino horn medicinal products in the past 5 years and a further 345 who expressed some interest in purchasing rhino horn medicinal products in the future. In particular, we estimate willingness to pay for horn that differs according to source (farmed, semi-wild, farmed) harvesting method (lethal and non-lethal), rarity of the rhino species and price. We also compare preferences elicited in the context of illegal trade in rhino horn, compared to legalised trade, and how consumer preferences vary according to socio-economic variables such as income. We find that preferences are significantly influenced by source and harvesting method and income level, with non-lethal harvesting and wild sourced horn generally preferred especially by the richest consumers, who are also the consumers most likely to have previously bought horn products. Under a legal trade demand would fall for all horn types and consumer groups. |
| Keywords: | : choice experiment, willingness to pay, demand for endangered species, international trade, rhino horn products |
| JEL: | Q27 Q51 Q57 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:sss:wpaper:2016-10&r=upt |
| By: | Sauter, Philipp; Hermann, Daniel; Musshoff, Oliver |
| Keywords: | Agricultural and Food Policy, Environmental Economics and Policy, |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aare16:235515&r=upt |
| By: | Yu Zhou; Shigehiro Serizawa |
| Abstract: | We consider the allocation problem of assigning heterogeneous objects to a group of agents and determining how much they should pay. Each agent receives at most one object. Agents have non-quasi-linear preferences over bundles, each consisting of an object and a payment. Especially, we focus on the cases: (i) objects are linearly ranked, and as long as objects are equally priced, agents commonly prefer a higher ranked object to a lower ranked one, and (ii) objects are partitioned into several tiers, and as long as objects are equally priced, agents commonly prefer an object in the higher tier to an object in the lower tier. The minimum price rule assigns minimum price (Walrasian) equilibrium to each preference profile. We establish: (i) on a common-object-ranking domain, the minimum price rule is the only rule satisfying efficiency, strategy-proofness, individual rationality and no subsidy, and (ii) on a common-tiered-object domain, the minimum price rule is the only rule satisfying these four axioms. |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0971&r=upt |